Is a DAO + LLC Still a DAO?

The way many DAOs are legally structured means they’re not DAOs in a true sense.

AccessTimeIconJan 7, 2022 at 5:37 p.m. UTC
AccessTimeIconJan 7, 2022 at 5:37 p.m. UTC

Cristina Carrascosa is a tax lawyer and CEO of ATH21, the first crypto specialized law firm in Spain. She regularly writes the crypto-related newsletter Legal by Design.

2021 was the year of the decentralized autonomous organization, or DAO. Projects like PleasrDAO, Friends With Benefits and ConstitutionDAO showed the potential for collective action and governance. DAOs are novel legal structures with a big future. But how will they work in practice? I have my doubts.

Decentralized autonomous organizations are, in very basic terms, communities represented by rules encoded as a computer program that is transparent, controlled by its members and not influenced by a central authority. And even though they seemed to have been fatally injured after The DAO hack in 2016, they are now rising again at a considerable speed.

Cristina Carrascosa is a tax lawyer and CEO of ATH21, the first crypto specialized law firm in Spain. She regularly writes the crypto-related newsletter Legal by Design.

ConstitutionDAO is the latest to get international attention. It was a community of crypto investors who launched a DAO with the objective of buying one of the 13 surviving copies of the U.S. Constitution that was up for sale at Sotheby’s in mid-November.

ConstitutionDAO launched just seven days before the auction and solicited donations from investors in exchange for tokens (PEOPLE) using a multisig wallet with 13 signatories listed on its website. In one week, the DAO raised an impressive $40 million.

Takeaways

Although the DAO did not win the auction, it’s worth considering several takeaways from the episode, as they may apply to other DAOs.

The first one is about the token.

As per the terms and conditions made public on their website, donors were granted the right to redeem governance tokens that contained the right to vote on certain decisions. No, the tokens did not represent property portions of the Constitutional text (if they had won the auction), but the right to have a say on the proposal set forth by the DAO, including the management and presentation plans for the text. Ownership would be in the hands of a Delaware-based limited liability company (LLC) and thus its shareholders would effectively be the owners of such a valuable piece.

The first question that comes to mind is this: Why would anyone in their right mind be willing to exclude and waive shareholder limited liability and go for a structure that pretty much increases it at an exponential level?

With many DAOs, a Delaware-based LLC holds all the ownership rights and serves as the beneficiary of the funds – or part of them – raised in a token sale launched by a DAO. It has no other responsibility than to forward proposals on the asset exposure based on a vote with crypto.

Both ConstitutionDAO and Flaming DAO – focused on non-fungible tokens (NFTs) – employed LLCs acting in support of virtual tokenized structures (DAOs). And the reason is obvious: operational agreements like LLCs are used to limit members’ liabilities and fiduciary obligations, to the extent permitted by the corresponding law.

DAO participants launch DAOs once they have this legal peace of mind. But if the back ends of DAOs end up being limited companies plus an operational agreement to warrant liability restriction, aren’t DAOs just the pretty, tokenized front ends?

Read more: What Is a DAO?

If they need to count with a legal, territorially bounded company that is used to specifically override the essence of a decentralized organization, are DAOs like ConstitutionDAO real DAOs?

Embryonic efforts

Is there a rush to push DAOs as revolutionary corporate structures when they still might be in an embryonic first phase of social experiments?

I look at the DAO space and definitely can see how tokens, governance systems, cross-border and trustless relationships can help with executing completely legitimate causes (like ConstitutionDAO). I also believe this may be the right path towards more complex and perhaps legally self-sufficient constructions. But we’re not there yet.

Before we can figure out a way to make DAOs legally more efficient and safer than vintage limited companies, and that will be hard to accomplish, DAOs are in the practice acting as a front end only. At the moment, the back end is represented by an old fashioned regulated corporate structure that grants certain protective rights very much appreciated when engaging in international, trustless, crypto adventures.

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Cristina Carrascosa is a tax lawyer and CEO of ATH21, the first crypto specialized law firm in Spain. She regularly writes the crypto-related newsletter Legal by Design.

Cristina Carrascosa is a tax lawyer and CEO of ATH21, the first crypto specialized law firm in Spain. She regularly writes the crypto-related newsletter Legal by Design.

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